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Gold and silver

America’s currency, America’s problem

Ned Naylor-Leyland looks at the runaway train that is “de-dollarisation.”

Read in 3 mins 24 viewed

The US trade wars that dominated headlines in 2018 are a symptom of an international monetary system that is in desperate need of reform.

It was in 1971 when John Connally, then US Secretary to the Treasury, addressed a group of European finance ministers and described the US dollar as “our currency, your problem.” Almost 50 years later and only now are we seeing the rest of the world question and challenge this status quo. The fact that China has gone ahead and developed its own regional trade initiatives, and is launching its currency into global markets, seems to lie behind much of the hot rhetoric, sanctions and tariffs.

Ever since former US President Richard Nixon defaulted on the US dollar-for-gold arrangement in the 1970s, which led to the demise of the Bretton Woods system and firmly positioned the greenback as the world’s international reserve currency, discontent has slowly been gathering momentum.

No longer is the “exorbitant privilege” of the US dollar sitting at the heart of the financial system deemed acceptable and economic powers from China to the European Union (EU) are signalling either via their words or their actions that change is afoot. US Treasuries buying has dried up and the long unspoken truth of the dollar being a political tool is finally being exposed.

This is where gold once again has the potential to play an important role as apolitical money.

In September 2018, Jean-Claude Juncker, the President of the European Commission, pointed out the absurdity of the EU paying for 80% of its energy import bill – worth €300bn a year – in dollars when only around 2% of its energy imports come from the US.

And throughout 2018, the Russians continued to buy gold and sell US Treasuries. Their rapid accumulation of the precious metal since 2014 (see chart) is supportive of the thesis that Russia has been converting yuan gas receipts into gold on the Shanghai Gold Exchange, in part to shield itself from the effects of the more tempestuous new world order. If true that the exchange facility is already functioning, this signals a return to an era where gold settled international trade, rather than US dollars or military might.

Other political rumblings elsewhere in the world are also potentially supportive of the yellow metal.

Turkish President Erdogan said that loans from the International Monetary Fund should be repaid in gold rather than US dollars, and Germany as recently as August called for a new global payment system.

Meanwhile, Marty Selmayr, the Secretary General of the EU Commission, has been tweeting about the need for – and history of – structural monetary change.

As the Chinese strategist, Sun Tzu once said,

“The supreme art of war is to subdue the enemy without fighting.”

Time will tell, but one thing is for sure: trade wars are about a lot more than tariffs.